Will Trump Tear Up His Own Trade Deal?

"NAFTA was the worst trade deal ever made... [USMCA] is the biggest trade deal in the United States’ history." -- Donald Trump

President Trump made these remarks about the North American Free Trade Agreement (NAFTA) during the 2018 announcement of the trade deal to replace it, the US-Mexico-Canada Agreement (USMCA). Of course, Mr. Trump didn't say that the "new" NAFTA is substantially similar to the old NAFTA. Trade hands knew it to be true, but nobody wanted to spoil the party. Six years later, businesses and consumers are wondering what the future holds for USMCA and the North American economy it underpins. We will know more in just a few weeks, but history holds helpful lessons.

At the beginning of Mr. Trump's first term, faced with a Trump threat to abandon NAFTA, the U.S., Mexican, and Canadian governments worked for more than a year to negotiate a successor agreement that would meet with the new president's approval. The USMCA agreement they produced was not a radical departure from NAFTA, but it differed from its much-maligned predecessor in three ways:

• First and most importantly, it made some significant tweaks to the "rules of origin" that determine which products get preferential tariff treatment within North America. These changes were meant to promote more U.S. manufacturing and use of parts and components from within North America, particularly in the totemic auto sector.
• Next, the new agreement clawed back some of NAFTA's more controversial provisions regarding investor-state dispute settlement (which had benefitted U.S. energy and mining companies, particularly) while making labor and environmental protections (of special interest to congressional Democrats) tougher and more enforceable.
• Finally, USMCA added new market-opening measures to benefit some of America's most innovative industries, such as groundbreaking digital trade rules and intellectual property rights for biologic medicines.

These changes to NAFTA (and a new name) were enough to win Congress's most significant bipartisan support for any trade agreement in more than a generation. Robert Lighthizer, Trump's first-term U.S. Trade Representative, was rightly credited with threading a needle: replacing the hated NAFTA while preserving -- and in some ways expanding -- the integrated North American trading system.

But Trump 2.0 won't be a straightforward sequel of the first term, and there are worrying signs: Lighthizer won't be back, but Peter Navarro will be. It is not clear whether there will be pro-trade voices within the Administration. This, plus Mr. Trump's recent threats to impose 25% tariffs on ALL imports from Canada and Mexico, means the future of USMCA is very much up in the air. What can businesses expect?

Threshold Question: Will USMCA Survive?

The first question is whether the USMCA will survive Trump's first month in office. Imposing "day one" 25% tariffs on every item imported from Canada and Mexico would mean the United States effectively abrogates the USMCA; no provision of the agreement envisions or allows such a move. For Mr. Trump, tearing up a trade agreement—even one he negotiated and touted—may come naturally. But the real-world economic effects would be quite severe.

Over the last 30 years, the North American supply chain has become the most integrated and interdependent in the world. If ad hoc tariffs imposed on a whim supplant the predictability and relative stability of USMCA, countless U.S. manufacturing industries would see critical supply chains disrupted or destroyed. Alternative sources of supply may exist, but transportation costs and logistical delays would be significant. Production costs would increase quickly, with consumer price hikes not far behind. As Ontario Premier Doug Ford rightly pointed out, critical fuel and electricity supplies from Canada could be shut down, plunging parts of the Northern United States into an immediate energy crisis. If you're planning a Super Bowl party, get ready to pay more for your Modelo beer (America's #1 imported brand) and guacamole.

There are reasons to believe this worst-case scenario won't happen. The financial markets will be the primary discipline on tariffs for the next several years, and the reaction to a complete renunciation of USMCA would be severe. Both governments could take concrete steps on border security and fentanyl interdiction to give Trump an early "win" or the perception of one. Newly elected President Sheinbaum in Mexico is focused on such deliverables, although chaos in an already weak Trudeau government could complicate the process in Ottawa.

Selective Tariffs Likely During USMCA Revision Talks

If blanket tariffs are avoided, it would not be surprising to see a new administration impose selective tariffs on Mexican and Canadian imports as a form of pre-emptive leverage for the negotiations over revisions to USMCA due under the terms of the agreement in mid-2026. Indeed, during the campaign, Mr. Trump announced his intention to seek revisions to USMCA, suggesting that he wants to change it and not abandon it entirely. Something similar happened in Trump's first term when tariffs on North American steel and aluminum were imposed (under Section 232 of the Trade Expansion Act of 1962) for "national security" reasons, even during ongoing negotiations on replacing NAFTA. If selective tariffs are imposed again, the most likely targets would be imports from Mexico that raise concerns about pass-through from China, such as auto parts, electronics and IT equipment, and furniture.

What Might a Revised USMCA Look Like?

The business community was fortunate that USMCA strongly resembled NAFTA. Indeed, the business community proposed some of the new agreement's innovative changes. Businesses tolerated and accepted other less market-friendly changes as the price of maintaining an integrated North American economy. Will history repeat itself in negotiations to revise USMCA?

Several key issues would have to be addressed in a review of the agreement:

• Closing the door to "pass-through" products that are not substantially made in North America, mainly from Chinese-owned factories in Mexico. This could be accomplished through changes to rules of origin or even specific carve-outs for named facilities or companies. Excluding Chinese electric vehicles from the United States will be a particular focus for the Trump administration; Republicans and Democrats alike have called for a broad review of USMCA's automotive rules of origin.
• Imposing a more stringent foreign investment review process on Chinese investment in critical industries or infrastructure, especially in Mexico. While this would likely happen outside the scope of USMCA, the Mexican government is already consulting with the Treasury Department about the CFIUS process of foreign investment review, seeking to learn how such reviews might be conducted in their country. This is a wise move.
• Mexico's constitutional reforms have raised serious concerns with U.S. companies invested in Mexico's energy, telecoms, and mining sectors. These industries are likely to seek improved protections against arbitrary action. Cooperative North American efforts on critical minerals mining and processing could also be discussed as a counterweight to China's dominance in this field.
• The review will probably address some perennial trade irritants, such as the US-Canada dairy dispute and the proposed Canadian digital services tax on U.S. tech companies.
• Negotiators also must expect the unexpected when President Trump or others in his administration suddenly introduce new issues that have nothing to do with trade.

None of these should be insurmountable challenges for trade negotiators looking to update USMCA while maintaining the foundations of the integrated North American economy. Negotiations would be complex, as they always are among large trading partners, but the result could be an improved and strengthened USMCA. The wild card will be President Trump's love of tariffs, which he sees as the answer to almost every problem, and his chaotic style of policymaking. Businesses invested in North America should fight to preserve USMCA even as they seek to improve and update it.